Hurricane Matthew's Impact Raises Insurance Questions

October 20, 2016

Michael McShane

By Brendan O'Hallarn

The remnants of Hurricane Matthew hit Hampton Roads with a stronger-than-expected wallop. Hundreds of thousands of residents were without power, some for an extended period of time. In Virginia Beach alone, more than 600 homes were inspected by emergency management personnel, with about 100 sustaining major damage.

That made Old Dominion University risk management and insurance scholar Michael McShane curious.

McShane, who leads the Insurance and Financial Services Center in Old Dominion's Strome College of Business and researches flood insurance offered by the National Flood Insurance Program (NFIP), has published research about flood insurance that compares the system in the United States with the system in Great Britain, along with research about the effect that rising sea levels will have on the program.

McShane became intrigued when he learned of a student whose home sustained wind damage and was told by the insurance company that the policy's hurricane deductible would apply, even though Matthew was not a hurricane when it hit Virginia.

Some insurers apply the hurricane deductible if the storm was a hurricane at one point, even if not a named storm when it caused the damage in question. Other insurers apply the deductible only if the storm is a hurricane when it hits.

"This can make a huge difference in the amount of the deductible," McShane said.

The hurricane deductible is typically a percent of the total value of the policy limit for the house. For example, if the hurricane deductible is 5 percent and the homeowner has a $300,000 policy limit, the hurricane deductible is $15,000. If the hurricane deductible is not used, the standard flat deductible, typically around $1,000, is applied.

"The bottom line is that policyholders really need to find out in advance how their hurricane or 'named storm' deductible works, to avoid the surprise of a large deductible applying to their wind loss," McShane said. "A hurricane deductible being charged can mean thousands of extra dollars the policyholder pays on a wind loss claim."

In addition to wind damage, flooding in Hampton Roads due to Matthew was also extensive. In the annual Life in Hampton Roads survey, released in September by Old Dominion University's Social Science Research Center, 35 percent of homeowners and renters reported having flood insurance. However, more than half of respondents believe that their existing insurance policy covers overland flooding.

It does not; homeowners or renters need a flood insurance policy from the NFIP. This can be confusing, McShane said.

"Almost every storm, we hear about homes getting flooded even though they're outside of the 100-year flood zone," he said. "A lot of people think their homeowners' insurance covers flood loss, and it doesn't."

To learn more about the Insurance and Financial Services Center, visit the Strome College of Business website.